China’s property crisis intensifies & Huobi insolvency fears surge

Here's how you should manage these risks.
Team Halogen
August 14, 2023

Market Movements

Global Macro Highlights

Source: Bloomberg
🔼 US Core CPI rises moderately for a second month
📉 US Bank shares drop as Moody’s cuts ratings
❌ Country Garden misses bond payments as China property fears flare
🇨🇳 China’s economy slides into deflation, raises concern about economic future

In the wake of the Fitch downgrade, Moody's downgrading of the credit ratings of 10 US banks by 1 notch didn't have quite the same impact as the former event, but certainly didn't improve the outlook of the US financial economy. Broad market barometers stayed suppressed throughout the week ahead of the US July CPI data release.

On the other side of the world, weak Chinese economic data and Country Garden purportedly missing two USD bond coupon payments sparked a selloff in the region, with regional equities and currencies taking a hit.

Despite a weaker than expected CPI print confirming a modest disinflationary trend, risky assets were not able to sustain the post-data rally. Initially, SPX 500 futures initially traded 35 points higher to 4540 levels and 10y treasury yields fell 5 basis points to 3.96%. From there, a sharp selloff was waiting in the wings. SPX futures then saw a 1% pullback from its daily high, and treasury yields look to continue the trend of higher rates which we saw last week.

Malaysian Markets Highlights

Source: Bloomberg
🏗️ Economists caution weaker-than-expected industrial output outlook 
🇲🇾 Malaysia’s political blocs ended in 3:3 status quo as opposition gains ground

In the region, our local equity bourse KLCI was spared the selloff that hit Chinese and Hong Kong equities, despite the tight correlation. 

However, USDMYR traded higher, starting the week at 4.5500 but closing at 4.5880, in tandem with stronger USD vs. regional peers. The tight correlation between Malaysia and China persists. Beyond that though, local risk assets were in line with regional peer performance, despite what was perceived to be a heated state election this weekend.

‍Crypto Market Highlights

Huobi's total assets vs. inflows (DeFiLlama)
Source: Cointelegraph
💸 Huobi sees US$105 million outflow amid insolvency rumours
💲 PayPal pushes deeper into crypto payments with stablecoin launch
🧑‍⚖️ SEC seeks to appeal ruling that Ripple XRP isn't a security
🔍 Cathie Wood's Ark 21Shares Bitcoin ETF application decision pushed out by SEC

In the cryptosphere, the drama doesn't stop. 

Rumours that the Huobi exchange was insolvent started making the rounds late Sunday night on X (formerly Twitter), but subsequently got going after notable crypto news portals like Coindesk started reporting on it. 

An audit of Huobi's known hot wallet addresses showed sharp withdrawals in stablecoin balances, with the remaining reserves being insufficient to back user claims. Certainly, this brings back bad memories of Nov 2022, where FTX experienced a run on the exchange and huge short positions on its FTT token. The difference this time is that the Huobi token, HT, is not easily shorted. While perhaps the rumours were not without basis, large deposits started to flow back into Huobi on Wednesday, and quashed any attempt to make a run on Huobi.

Other than that though, Bitcoin continued to do its own thing. The pair has been comfortably trading in a new range of 28700 to 30300. The pair attempted to push above the psychological 30k level twice, but was ultimately rejected both times. Even the Thursday CPI print did nothing to rouse BTC from its slumber. Further updates about Ark’s ETF application are welcome, but did little to change the current price action trend.

Looking at Ripple - the SEC’s decision to appeal last month’s ruling had a bearish knee jerk effect, but ultimately did not sell off too much.

What are we monitoring for the week ahead

What does all of this mean? Our thoughts

US inflation is unlikely to accelerate in Q3 this year. August and September prints need to show year-on-year prints in the high 4s to reignite that narrative, and such data will surely show up in leading indicators beforehand.

Yet, US equities are unable to rally, and long-end treasury yields continue to rise.

As mentioned last week, bear steepening (long term rates rising faster than short term rates) has a tightening effect on financial/credit conditions. There are several theories floating around for this currently - escape valve given strong equity prices, US treasury auction oversupply, and actual tightening of credit in US financial plumbing among those theories.

Regardless, it wouldn’t hurt to have a slight bearish bias here. 

Closer to home in Malaysia, with state elections over and a preservation of the status quo (albeit with further gains by the opposition bloc), any perceived political overhang on Malaysian risk assets should abate. However, local assets are still very much at the mercy of the external environment currently. 

While the MYR’s slide to 4.68 and above in June was attributed to that narrative, any political risk premium was quickly priced out in July. Price action for the currency going into this weekend was in line with regional currency trends. In short, don’t expect a quick return to MYR strength just because the state elections have passed with little event.

As for crypto, there are a few things to unpack in crypto, but let’s start with XRP. Whether or not the SEC has a chance of winning the appeal, the current ruling remains the law - XRP sales on exchanges does not constitute sales of securities - and it will remain so for the entire timeline of the appeal process, which might take 2 or more years to resolve. In that time, sales of XRP on US exchanges can continue as usual. As such the situation should only impact the token from a sentiment perspective, and that’s getting stale.

On Bitcoin - again, BTC is unlikely to completely escape a major selloff in traditional assets, given these macroeconomic conditions. It is still a buy on dips, especially with some progress on the ETF front, but for now the tightly coiled price action could introduce some momentum in either direction once a breakout from this range happens. From a tactical perspective, respect the breakout momentum, but ultimately we need a bigger catalyst to confirm longer term price direction.

And on Huobi - no matter how remote the possibility, one should immediately withdraw any funds ASAP when such rumours arise. Yes, the negative sentiment died down and large deposits of stablecoins flowed back into the exchange. Huobi is running like nothing happened. But it is still not worth the risk. There were many supporters of FTX in the early days of the run, and they were left exposed when the house of cards fell.

Alternatively, make sure your money is with a trusted, regulated entity you can turn to for recourse.

And if you are looking for safer alternatives, consider investing in the Halogen Shariah Bitcoin Fund, the world's first regulated Shariah-compliant cryptocurrency fund that provides institutional-quality exposure to physical spot Bitcoin.

Thank you for reading and we’ll see you next week!

Team Halogen

Disclaimer: The information, analysis, and viewpoints presented here are intended solely for general informational purposes and should not be construed as personalised advice or recommendations for any specific individual or entity. For personalised investment decisions, individual investors are advised to consult their licensed financial professional advisor. The opinions expressed by the Manager are based on certain assumptions or prevailing market conditions, and they are subject to change without prior notice. This material is being distributed for informational purposes only and should not be regarded as investment advice or an endorsement of any particular security, strategy, or investment product. While the information provided herein may include data or opinions from sources believed to be reliable, its accuracy and completeness are not guaranteed. Reproduction of any part of this material in any form or reference to it in other publications is strictly prohibited without the express written permission from Halogen Capital Sdn Bhd. Halogen Capital Sdn Bhd and its employees assume no liability regarding the use of this material or its contents.

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October 27, 2023
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